Protection Against Fraud Afforded with Forensic Accounting Practices

January 24, 2012

Every business owner worries about fraud to some extent, but the damage hits harder when that fraud occurs within. This is especially true for larger organizations when internal controls are lacking and obvious warning signs are missed. However, when forensic accounting, the practice of analyzing, interpreting and presenting complex financial and business-related issues, is in place, red flags are immediately noticed so company leaders can act quickly.

A recent press release highlighted the importance of forensic accounting practices within organizations. Sareena Malik Sawhney, a forensic accountant serving as a director in the Litigation and Corporate Financial Advisory Services Group of New York accounting firm Marks Paneth & Shron LLP (MP&S), noted that companies can be severely impacted by fraud in terms of financial and productivity losses, especially a large company lacking the proper tools to identify problems.

The Association of Fraud Examiners 2010 Report to the Nations on Occupational Fraud and Abuse found that the typical organization loses 5 percent of its annual revenues to fraud. Perhaps even more disturbing is that fraud can last a median of 18 months before it is detected. When committed by senior executives or business owners, fraud is more than three times as costly as when committed by managers, and more than nine times as costly as fraud committed by employees.

Fortunately, there are warning signs for most common forms of fraud. With forensic accounting technology in place, management and board members are better equipped to recognize them, and therefore, better able to prevent or minimize loss. Sawhney shared a list of warning signs that can be identified through forensic accounting, including shrinking inventories when skimming is taking place; bank deposits that don’t match cash receipts; fluctuations in payroll; and changes or unusual patterns in employee expenses.

Oftentimes, these warning signs can be uncovered in spreadsheets used by professionals in an array of industries. While spreadsheets are one of the most brilliant and pervasive software tools leveraged in the business environment, they often are riddled with fraudulent activity or material errors for many reasons, including comfort of use, lack of security, and latent references and external links. This is when a forensic accounting solution designed to detect spreadsheet inconsistencies and errors can be leveraged in order to diminish the frequency of material errors and potential fraud, as well as the laborious process of reviewing spreadsheets.

While forensic accounting practices like spreadsheet analysis can help to identify such fraudulent activity, company leaders or board members must take precautionary steps to stop the activity and hold the offending person or persons accountable. As reported in the press release, James P. Lagios, a partner at Iseman, Cunningham, Riester & Hyde, LLP, suggests that other steps must be taken, specifically contacting an attorney or prosecutor.

"This is the first step in creating an effective, professional investigation that gets at the fraud quickly and protects the chain of evidence,” said Lagios. “An attorney or prosecutor will typically call in other professionals such as forensic accountants who can trace the details faster and more efficiently than the organization could on its own. It's crucial to contact an attorney quickly -- in order to recover misappropriated funds, prompt legal action is required -- both to preserve evidence and keep the fraud from continuing.”

The Board of Directors and Audit Committee should also be notified, and the company’s attorney should be consulted on the possibility of notifying the Attorney General’s office if the organization is a non-profit. Insurance policies should be reviewed, insurance companies notified, injunctive relief sought and a corrective plan developed.

While fraud will occur in every industry, companies can take the necessary steps to protect themselves with forensic accounting practices in place to identify guilty parties before too much damage is done.

Want to learn more about the latest in communications and technology? Then be sure to attend ITEXPO East 2012, taking place Jan. 31-Feb. 3 2012, in Miami, FL. ITEXPO (News - Alert) offers an educational program to help corporate decision makers select the right IP-based voice, video, fax and unified communications solutions to improve their operations. It's also where service providers learn how to profitably roll out the services their subscribers are clamoring for – and where resellers can learn about new growth opportunities. For more information on registering for ITEXPO registration click here.

Stay in touch with everything happening at ITEXPO. Follow us on Twitter.

Susan J. Campbell is a contributing editor for TMCnet and has also written for eastbiz.com. To read more of Susan’s articles, please visit her columnist page.

Edited by Tammy Wolf

Back to Forensic Accounting Channel »